Fitch expects probes of Chinese firms to go on

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Fitch Ratings says it does not expect the flow of accusations and investigations into Chinese companies over reported misconduct to slow any time soon, particularly if short-selling is involved.

'Some of the accusations will be legitimate; some will be erroneous; many will be a mixture,' said John Hatton, group credit officer for Asia-Pacific corporates, in a report.

'All have the potential to present liquidity problems for an individual issuer and its closest peers.'

The agency's report coincides with a series of scandals among Chinese companies, including financial software company LongTop Financial, commercial forest plantation operator Sino-Forest, and vegetable farmer Chaoda Modern Agriculture.

The scandals have contributed to sharp falls in the share prices of US and Hong Kong listed-Chinese stocks over the last two months amid concerns over mainland corporate governance. But the scandals are unlikely to deter venture capital and private equity funds from supporting pre-listing candidates say some observers.

Fitch said widespread weaknesses might cause diligent companies that adhered to local business practices to become vulnerable to exaggerated claims of irregularities as well. And once a company was 'blemished' it would have difficulties accessing capital markets, especially if there was an accompanying deterioration in investor sentiment.

The agency questioned the auditing standards of Chinese companies, saying that the systemic difficulties of operating in a country ranked below 40 in the World Bank's Corruption Index were all well-known features of doing business in China.

'China will not be comparable with developed market standards for as long as the country lacks a sufficiently dispersed shareholding structure, quality information for shareholders, and an uninhibited market for takeovers,' said Andrew Steel, head of Asia-Pacific Corporates.

40

China is ranked below this number in the World Bank's Corruption Index